The US federal debt-to-GDP ratio is projected to surpass 100% by 2026, approaching its post-World War II peak, while the Congressional Budget Office (CBO) projects it will rise to 120% over the next 10 years. Therefore, many believe the primary reason for the current rise in US Treasury yields is the excessive US debt. However, the reality is that debt concerns may be a catalyst, but not necessarily the main cause:
1. Combined US government and corporate interest payments have reached 3.8% of GDP, the highest since 2008, but only slightly higher than the 65-year average of 3.5%, and still lower than the 1990 peak of 5.9%. The real yield on 10-year TIPS, commonly used to measure the real cost of long-term US financing, has reached 2.91%, but only slightly higher than the pre-QE average of 2.74%. If debt were the primary driver of rising yields, current real interest rates should be significantly higher than pre-2008 levels.
2. Considering the rising economic growth and sticky inflation, yields should naturally be higher.
3. What worries the market most is that the US is artificially suppressing interest rates through measures such as interest rate cuts and yield curve control. This could actually force bond investors to withdraw and push up long-term yields. However, if the Federal Reserve tightens policy more aggressively, long-term yields may stabilize. This is the so-called "when the Fed panics, bond traders don't panic." (Macro Strategist Jim Bianco)
